Bet on underowned stocks; go for infra, midcaps: S Naren

Harsha Jethmalani
moneycontrol.com

Stocks which are underowned by institutional investors, particularly FIIs, have become attractive after the recent fall, says S Naren, Head CIO, ICICI Prudential AMC. According to him, the beaten-down infrastructure sector and midcaps will deliver the best returns over the next five years. “These will be most attractive sectors going ahead.  It is imperative for the country to have an improved Infrastructure growth,” he told moneycontrol.com in an interview. Despite Immigration Bill concerns looming on Indian IT companies, the fund house is reasonably bullish on this sector. Naren is betting his chips on export oriented sectors like pharmaceuticals, select textiles and auto ancillaries.  He is also overweight on telecom stocks. Valuations in the FMCG sector continue to be expensive, so Naren prefers staying away from it. Fears a rollback in quantitative easing by the US federal Reserve and general elections are two key risks facing the Indian market now. One should brace for high volatility in the next one year and investing through systematic investment plans is recommended, he added. Huge FII outflows seen recently from India indicate that our country is one of the best fixed-income markets to operate in as they (FIIs) managed to exit with least impact cost. So, India is likely to be the first beneficiary when the trend reverses, he said.  Also Read: Bearish on PSU banks, rupee weakness to persist: Religare Below is the edited transcript of the interview: Q: How serious is China’s liquidity problem? Do you think Asian markets will be out of FIIs radar due to low liquidity and Chinese issue? A: The liquidity problem in China is addressable. However, historical evidence of countries where credit has grown faster than GDP indicates that there are after effects. In our view, China may likely witness similar experience. In the Indian context, recent experience of FIIs suggests that India is one of the best fixed-income markets to operate in and also exit with least impact cost. India is the only country where FIIs were able to exit easily and with least impact cost. They could not pull out from other countries so easily. So when the reversal in trend comes, India is likely to be the first beneficiary.   Q: Market experts who were earlier bullish on IT stocks due to depreciating rupee are now saying that Immigration Bill issues will offset gains of falling rupee. Are you looking to trim your exposure to the sector? What would be your pecking order as far as sectors are concerned? What about infra stocks? A: The Immigration Bill being implemented in its current form will be worrying for us. Other than this aspect, we are reasonably bullish on this sector. We are also bullish on other export oriented sectors like Pharmaceuticals, select Textiles and Auto ancillaries. We are overweight on Telecom, as that is one sector wherein the revenue per minute has to go up. All the stocks in which the FIIs have not invested have become extremely attractive. Over the next five years, we think that midcaps and Infrastructure sector are most attractive. It is imperative for the country to have an improved Infrastructure growth. We continue to remain underweight on FMCG. While this call hasn’t played out, we still believe that valuations in this sector are very expensive. Q: What is your take on power stocks after CCEA allowed them to pass on the costs of imported coal to customers? Is the worst over for the sector? What about infra stocks? A: Surprisingly there has been no major impact on the sector. We are positive on the regulated power utility companies which are not affected by this decision. We have selectively looked at companies that are available at attractive valuations and avoided companies where there is considerable leverage. _PAGEBREAK_ Q: Is the market anywhere close to forming a bottom? What levels are you watching out for on the Nifty in the near-term? How are you positioned right now? A: The future outlook of market would be dependent on FII selling and what happens to the currency. In our view, USD will further strengthen against emerging market currencies and portfolios are accordingly positioned. Q: What is your outlook on the rupee? It has hit the psychological level of 60/USD are we heading to 62/USD soon? A: We believe that if India is able to bring down Current Account Deficit (CAD) then the outlook for rupee will improve significantly. The step taken by Government to curtail Gold imports is a welcome step. However, we also need big export thrust to actually cut the Current Account Deficit (CAD) of the country. Q: Bonds are now not giving returns like before. Gold price has also fallen. Equities continue to remain volatile. In such a scenario, what should be the asset allocation strategy for retail investors? A: In our opinion the asset classes which have not generated returns in the recent past like equity are attractive from the long term perspective. Consequently investors should maintain a reasonable asset allocation strategy for all such asset classes. In our framework if an asset class performs badly it actually becomes more attractive for long term investments. Q: What is the key macro-economic data/event you are watching out now? How do you expect the market to perform as we head closer to elections? A: The near term event is based on what the global central banks do on QE tapering and the impact of tapering of quantitative easing on their respective countries. The second big event is the local election. We believe that the market will be volatile over the next one year on account of these two reasons. We recommend investing over the next 12-15 months through systematic investments or invest in products like ICICI Prudential Dynamic Plan or ICICI Prudential Volatility Advantage Fund. These funds are designed to benefit from volatility.